The government’s coronavirus business interruption loan scheme “is not fit for purpose”, according to international consultancy and economic analysis firm Fideres.
The London-based company, which specialises in competition economics, says the government’s strategy fails to meet three basic criteria.
Fideres argues that the loan scheme is not simple, fast or fair.
The consultancy says it is not simple because “it leaves it to each bank to determine, based on their criteria, which business can obtain a loan on standard commercial terms” and “requires banks to expand hugely their balance sheets”.
It adds in a report on the loan scheme that it is “a time-consuming process” as businesses are required to “shop around” for the best offers and must “apply for loans through traditional banking channels”.
Finally, Fideres says it is not fair to taxpayers, employees or business owners, because it leaves them all vulnerable. It argues there are no guarantees to commit to saving jobs and exposes businesses to predatory lending practices.
Meanwhile there is nothing to stop employees losing their jobs while businesses increase dividends, it adds.
The report suggests three solutions.
Firstly, it says banks “should only administer the lending scheme, not make lending or commercial decisions” to eliminate the need to shop around, speed up the overall process and “guarantee that all business owners have a level playing field”.
It also argues that “loan terms must be directly tied to employment commitments” and that if employees are laid off, then “the amount of funding available decreases”.
It says if the scheme is tied to the payroll then “it creates an incentive for businesses to maintain current staffing and rehire employees laid off in the past few weeks”.
Finally, Fideres argues that “loan advances must be tied to business owners’ covenants such as: a ban on dividends and a commitment to spend at least 80 per cent of the loans on payroll and draws”.
It suggests a strategy that would see the loans remain interest-free until the coronavirus crisis has averted. Then the businesses that have preserved the same staff levels should get a lower interest rate than those who have not.
Founding partner of Fideres, Alberto Thomas, said the current proposal “falls short of providing the reassurance that employees and businesses need.”
“It is time to act now and fast to halt the wave of layoffs that will leave a lot of people without jobs. Consumers’ spending accounts for almost 70% of UK GDP,” he said.
“By giving employees the security of their jobs, by directly linking the loans to payrolls, the government will signal to individuals that employers will spend the majority of the loans to save their jobs and reduce their anxiety.”
City A.M. has contacted the Treasury for comment.